3.5.3 Minimum wage legislation

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    The minimum wage was introduced in 1999 by Labour in the UK. The National Minimum Wage is an example of a minimum price. It must be set above the free market price, like other minimum prices or it will be ineffective.

    Minimum wage in developing countries is often set quite low. There are benefits to workers in the formal sector, but it is very hard to track the ‘unofficial’ workforce (rural workers). They have reduced poverty to some extent.

    SKILLS SHORTAGES AND THEIR EFFECT ON INTERNATIONAL COMPETITIVENESS

     

    International competitiveness – ability of a nation to compete successfully overseas and                                                      sustain improvements in real output and living standards.

     

    Skills shortages limit innovation and raise costs for firms as they have to pay higher wages to retain skilled workers. Businesses struggle to expand when there are skills shortages as human capital is important for economic development.

     

    By developing human capital, countries can move their production further up the supply chain, from primary resources to the secondary sector (manufacturing), which means they can earn more. A more skilled workforce also means higher productivity which lowers labour unit costs, making them more competitive coupled with better quality products increasing their competitive advantage. If skills are limited, the economy cannot expand productive potential, preventing this from happening.

     

    Also, a skilled workforce is generally more flexible, and this helps it respond better to economic shocks and changes in demand and supply, which also helps international competitiveness.

     

    Migration within economies is the movement from an area where there are few jobs to where there are more jobs e.g. from Cupar to Edinburgh.

    • If migrants have scarce skills they will be able to afford the higher costs of housing (as they will be paid higher wages for otherwise unavailable skills). if they cannot afford these costs they will stay in areas of high unemployment.
    • Mass migration has occurred in China from rural to urban areas.

     

    Migration between economies is the movement of workers between countries, often in search of jobs e.g. Mexican immigrants provide cheap labour for the US farming industry.

    • Migrants are often of working age so cause supply of labour to increase and usually cause wages to fall.
    • Migration especially affects the supply of labour at lower wage rates as they usually come from economies with low wages.
    • Existing employees face more competition for jobs and may have to work for lower wages. Average wages can fall as a result, but this impact is small and has less effect on medium and higher income households.
    • Migrants can bring high quality skills to the domestic workforce, increasing the productivity and skill set of the labour market.

     

    INEQUALITY AND INCENTIVES

    Inequality:

    • Growth of part-time and temporary jobs instead of full-time jobs means that people become underemployed, and earnings become limited.
    • Wage gap between skilled/unskilled workers has increased in the UK as those with a degree generally earn more over a lifetime than those with only A levels. There is a particular gap between low-skilled jobs in the public sector and those in private sector.
    • Gender pay gap still remains even despite the equal pay laws, which has lessened gaps which still remain due to career breaks or fewer hours worked. Women are also discriminated against in promotions which effectively locks them out of higher paying jobs.
    • State pensions and welfare payments tend to increase less than wages, even though they are index-linked to inflation. This means that those on benefits see a smaller real increase in their income compared to those in jobs.
    • Pay freezes (austerity) in public sector jobs causes lower pay than the private sector
    • Regressive taxes mean that those on lower incomes bear a larger burden of the tax.

     

    INCENTIVES

    • Lower benefits incentivise people to enter the labour market rather than rely on welfare payments.
    • Low pay in low-skilled sectors will lead to more people training and going into further education to increase their pay

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